MOST people in Malaysia simply cannot afford to buy a house, no thanks to the era of low interest rates globally, which are just beginning to reverse. Given the amount of money that developers, banks and consumers have poured into real estate, allowing property prices to fall to a new demand-and-supply equilibrium may create new headaches for policymakers.
A government laden with RM1 trillion in debt and multiple challenges will be hard-pressed to subsidise home ownership. In Malaysia, because land belongs to the respective states and not the federal government, the problem is even more complex. (See next page: sizeable land income complicates housing issue)
The longer-term solution is to help Malaysians earn higher wages so that they can afford the houses that are out of their reach. Education and reskilling cannot happen overnight.
For Malaysians with higher income growth capacity, however, the ability to afford a pricier home today can take place within a much shorter period — with the help of a financial investor.
What’s more, this solution is not just limited to affordable homes but also applies to higher-end properties that young professionals may afford, say, five or 10 years down the road, but which they cannot today because of insufficient income stream.
Here is where deep-pocketed pension funds and investors that are seeking long-term, stable and inflation-protected income stream come in.
The main objective of the Employees Provident Fund (EPF), for instance, is to preserve and protect members’ retirement savings by generating a return that beats inflation by at least 2% over three-year rolling periods. That is why at least half of the EPF’s RM800 billion plus funds are invested in fixed income instruments, which provides it with a consistent and stable income stream. Even EPF’s equity investments include dividend-paying stocks.
The steady income stream — from dividends, interest from debt paper and real estate rental, among others — is necessary because the EPF declares its dividend to members out of realised net income every year. Without these periodic income streams, the EPF would have to sell its investment assets to get money to pay dividends to members. This is why any asset that can generate strong and steady cash flow over the medium to long-term period is much sought after by funds such as the EPF.
The agreement with a prospective homebuyer can be likened to a long-term lease with little risk of the property being left without a tenant. The tenant, or, in this case, the prospective homebuyer who is seeking a leg up in property ownership, would likely be someone with the capability to earn a much higher income in the medium term and who can service the monthly lease on the property for a long-enough period, and eventually, to buy it.
The availability of deep-pocketed financial investors also reduces the risk profile for banks, which may continue to be property loan providers without having to compromise on prudent mortgage lending rules and face a higher risk of non-performing loans. The profit-sharing agreement should not be too hard for bankers to work out.
For prospective homebuyers, the agreement allows them to enter the property market at today’s prices with the aid of their future earnings capability — what some people call lifetime income earnings capacity — rather than just their current income.
The assumption is that property prices are likely to be cheaper today than five years down the road. It also means rental payment goes towards one’s home ownership pool earlier.
Whether the home buyer is the beneficiary or is getting the short end of the stick depends on one’s assumption of future home prices. It also depends on how much is the spread or profit margin that the bank and financial investor take to work out a home mortgage scheme based on the buyer’s future or prospective income stream.
The spread is essentially the price prospective homebuyers pay to get into the property market earlier than they would have been able to on their current income.
Whether or not they are being helped to buy a property they really cannot afford depends on the spread and financial assumptions made at the time the agreement is entered into.
Consumers — especially those in lower and middle income segment — would no doubt be financially better off if the government is able to provide some subsidy towards homeownership than having to pay a guarantor or financial investor a spread to obtain a bigger home loan.
As government resources are currently limited because of its huge debt burden, the priority of any subsidy would likely be to help those with lower income and smaller prospects of strong earnings growth. The rest of us will need to think about what works best financially in the long term as we also need to plan for healthcare as well as old-age savings, and not just owning a dream property.